An Empirical Assessment of a Tradeoff Between FDI and Exports

The relation between exports and FDI could be complementary or substitutable depending on the types of FDI. Overseas investment to displace exports must have a substitution relation while FDI for vertical fragmentation between countries would boost the home export. Empirical studies have generally found a positive relation and finding a substitution relation is relatively recent. We investigate the relation between those two variables using detailed information of Korean multinational firms and their foreign affiliates from 1999 to 2004. In so doing, unlike previous studies, we consider the host country’s income level and various activities of each affiliate, whether it serves the host country or exports outside in particular. The complementary relation is found by simply following previous studies. Once we consider the host country’s income level and various activities of each affiliate, however, different results are produced. Our empirical results show substitution if the affiliates are located in a developed country and mainly serve the host country, while complementarity if the affiliates export their products outside of the host country. Moreover, the complementary effect is strengthened if they are located in a less developed country.